An automaker is considering installing a three-dimensional (3-D) computerized ca

Question

An automaker is considering installing a three-dimensional (3-D) computerized car-styling system at a cost of $230,000 (including hardware and software). With the 3 D computer modeling system, designers will have the ability to view their design from many angles and to fully account for the space required for the engine and passengers The digital information used to create the computer model can be revised in consultation with engineers, and the data can he used to run milling machines that make physical models quickly and precisely The automaker expects to decrease the turnaround time for designing a new automobile model (from configuration to final design) by 22%. The expected savings in dollars is $250,000 per year. The training and operating maintenance cost for the new system is expected to be $50,000 per year. The system has a five-year useful life and can be depreciated according to the five year MACRS class The system will have an estimated salvage value of $5,000. The automaker's marginal tax rate is 40% Determine the annual cash flows for this investment What is the return on investment for the project?

Explanation / Answer

Year 1 2 3 4 5 Expected Savings a $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 Costs b $50,000.00 $50,000.00 $50,000.00 $50,000.00 $50,000.00 Depreciation Rate c 20% 32% 19.20% 11.52% 11.52% Depreciation per year d = c*$230000 $46,000.00 $73,600.00 $44,160.00 $26,496.00 $26,496.00 Earnings before Tax e = a-b-d $154,000.00 $126,400.00 $155,840.00 $173,504.00 $173,504.00 Taxes at 40% f = e*40% $61,600.00 $50,560.00 $62,336.00 $69,401.60 $69,401.60 Earnings after Tax g = e - f $92,400.00 $75,840.00 $93,504.00 $104,102.40 $104,102.40 Cashflow from operations h = g+d $138,400.00 $149,440.00 $137,664.00 $130,598.40 $130,598.40 Post tax salvage value of Machine i $0.00 $0.00 $0.00 $0.00 $8,299.20 Net Cashflows j = h+i $138,400.00 $149,440.00 $137,664.00 $130,598.40 $138,897.60 PV Factor at 45% k 0.6897 0.4756 0.3280 0.2262 0.1560 Present Value at 45% l = j*k $95,448.28 $71,077.29 $45,156.09 $29,543.77 $21,669.79 PV of Inflow at 45% $262,895.22 PV Factor at 50% m 0.6667 0.4444 0.2963 0.1975 0.1317 Present Value at 50% n = j*m $92,266.67 $66,417.78 $40,789.33 $25,797.21 $18,291.04 PV of Inflow at 50% $243,562.03 Initial Outflow $230,000.00 At IRR, PV of Inflow = PV of Outflow IRR = 50% + [(230000 - 243562.03) / (262895.22 - 243562.03)]*(45-50)% = 50% + (13562.03/ 19333.18)*5% = 50% + 3.5074% = 53.5074% Note 1 Purchase Cost of Machine $230,000.00 Less: Accumulated Depreciation $216,752.00 Book Value (a) $13,248.00 Market Value of Machine (b) $5,000.00 Loss on Sale on Machine (c = a-b) $8,248.00 Tax Shield on Loss (d = c*40%) $3,299.20 Post Tax Salvage Value (b+d) $8,299.20

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